The Impact of the Coronavirus Outbreak on Mergers and Acquisitions
June 22, 2020
By Mojahed Al Sabae
Since its declaration by the World Health Organization as a pandemic, COVID-19 has impacted many companies and states across the globe, causing them tremendous financial and economic damage. Although the implications of the outbreak vary from one sector to another around the world, it has imposed a new reality that many companies and countries are still trying hard to cope with.
We have witnessed a significant growth in merger and acquisition transactions during the last 10 years, and companies and investors find themselves today facing a new reality. This may compel them either to speed up the completion of ongoing transactions to avoid them being affected by the pandemic, which may result in increased risks. Alternatively, they may suspend or even walk away from some of the already planned acquisitions. Reasons for this may include issues associated with valuing the targeted assets or companies, arranging the required funds to finance the transactions, or addressing other implications of the pandemic.
While some acquisition transactions are still in process and not yet completed, the outbreak of the pandemic made them vulnerable to new challenges. These challenges relate not only to the valuation of the targeted assets, due to the volatility of global and local financial markets and the investors’ ability to maintain the necessary cash flow to finance the transaction, but also the implications of the pandemic on the activities of the targeted company, which are often reflected in the anticipated revenues of the target companies. These aspects will have an impact on the value of the targeted company and the due diligence to be conducted in connection with the transaction, which may require review in order to focus on specific elements to which the targeted companies may have been exposed by the current circumstances.
Despite these challenges, the pandemic will still create many positive opportunities for investors to acquire companies and assets, whether movable or immovable. Sometimes, this may be the best solution to save failing companies that are threatened with bankruptcy or liquidation.
Furthermore, the challenges imposed by the pandemic have strongly motivated many companies to consider restructuring their subsidiaries and assets, or even merge with other companies. This may help to reduce their administrative structure and facilitate the sharing of resources, with the view to reducing operating expenses and contain the damages incurred or which might be incurred by the global economic repercussions of the virus.
On the other hand, the recently issued Resolution No. 16 of 2020 by the UAE’s Ministers Cabinet (the “Resolution”), which was issued in accordance with the Federal Law No. 19 of 2018 in connection with the foreign direct investment, the UAE may experience a significant positive impact on merger and acquisitions transactions. The Resolution contained the long-awaited positive list of the economic sectors and activities in which foreign direct investment is permitted, as an exception from the restrictions imposed by the Federal Companies Law No. 2 of 2015 and its amendments. This will allow UAE companies with such activities to be fully owned by foreign investors without a local partner.
This Resolution will not only attract and enhance the flow of new foreign direct investments into the state, but it will also increase the merger and acquisition transactions as well as the restructuring activities of existing companies. This is due to the fact that many foreign investors will consider entering the local markets by acquiring existing local companies, while some foreign investors within the UAE will contemplate increasing their shares in existing local companies which they already partially own, by acquiring some or all of the shares of their local partners. The restructuring or acquisitions in these cases might be subject to less stringent requirements, especially in terms of valuation or due diligence, as investors targeting these companies will often already be thoroughly aware of their financial and legal position.
However, such transactions will still need to be carefully examined, planned and executed, whether by the foreign investor who already partially owns the company, or by the other partners who are exiting the company, whether they are foreigners or locals. The investors must carefully observe all the rights, obligations and commitment of all the partners in accordance with memorandum and articles of association of the targeted companies and any shareholders’ agreements that may have been signed by them, and all the relevant undertakings or obligations associated with them, including any loans or declarations that may have been granted by one of the partners to the others.